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INTRODUCTIONTOBANKSANDTHEIRFUNCTIONS

UNITSTRUCTURE
1. LearningObjectives

2. Introduction

3. MeaningofBanking

4. ImportanceofBanking

5. ClassificationofBanks

6.
CentralBank

7.
FunctionsofCentralBank

8.
CommercialBanks

9. FunctionsofCommercialBanks

10.
CooperativeBanks

11. RegionalRuralBanks

12.
PrivateBanking

13.
ServicesOfferedUnderPrivateBanking

14. LetUsSumUp

15.
FurtherReadings

16.
AnswersToCheckYourProgress

17. PossibleQuestions

LEARNINGOBJECTIVES

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Aftergoingthroughthisunityouwillbeableto:
definebankandbankingbusiness

explaintheimportanceofbanking
describethenatureandfunctionsofcommercialbanks

explainthesignificanceofCentralBankanditsfunctions

discussthenatureandfunctionsofRegionalRuralBanks

analyzetheconceptofprivatebanking

INTRODUCTION

Youmighthaveseenorvisitedabankbranch,wherepeoplekeeptheirsurplusmoneyandwithdraw(ortakeloan)moneyinnecessity.Inallovertheworldmostcommonfunctionofbanksare
acceptingdepositsfromthepublicanddeploythefundsbywayofloansandadvancestotradeandindustrytomeettheirfinancialrequirements.Thispracticeofacceptingdepositsandlendingfor
shorttermsisknownascommercialbankingordepositbanking.TheIndianbankingsystemconsistsofscheduledbanksinthepublicsector(27),privatesectorbanks(35),foreignbanks(36),
cooperativebanks(28)andregionalruralbanks(196).ThebankingsystemofIndiaisgovernedbytheBankingRegulationAct,1949andtheReserveBankofIndiaAct,1934.Inthisunitwewill
discussthemeaningandconceptofbanks,commercialbanksanditsfunctions,centralbankactivities,RRBs,theconceptofprivatebankingetc.

MEANINGOFBANKING

InIndia,BankingisdefinedbyBankingRegulationAct,1949undersection5(b)asthebusinessofacceptanceofdeposits
of money from public for the purpose of lending or investment which may be repayable on demand or otherwise and
withdrawablebycheque,draft,andorderorotherwise.Henceabankmustperformthefollowingtwofunctionstobecalled
asabank

Acceptanceofdepositsand
Lendingorinvestmentofsuchdeposits

The Banking Regulation Act, 1949, under section 49A no person other than a bank is authorized to accept deposits
withdrawablebycheque.However,savingsbanksrunbythegovernmentareexemptedfromthisprohibition.
UnderEnglishlaw,bankisdefinedasapersonwhocarriesonthebusinessofbanking,whichis:

conductingcurrentaccountsforcustomers
payingchequesdrawnonagivenperson,and
collectingchequesfortheircustomers.

UndertheEnglishlaw,BillsofExchangeActdefinesthetermbankerasabodyofpersons,whetherincorporatedornot,
whocarryonthebusinessofbanking.ThebusinessofbankingisinmanyEnglishcommonlawcountriesnotdefinedby
statutebutbycommonlaw.InEnglishcommonlawjurisdictionstherearestatutorydefinitionsofthebusinessofbankingor
bankingbusiness."Bankingbusiness"meansthebusinessofreceivingmoneyoncurrentordepositaccount,payingand
collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other
businessastheAuthoritymayprescribeforthepurposesofthisAct
Hence,"bankingbusiness"meansthebusinessofeitherorbothofthefollowing

receiving from the general public money on current, deposit, savings or other similar account repayable on demand or
withinlessthan3months...orwithinaperiodofcallornoticeoflessthanthatperiod
payingorcollectingchequesdrawnbyorpaidinbycustomers

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Abankerorbank is a financial institution that acts as a payment agent for customers, and borrows and lends money. In
some countries such as Germany and Japan, banks are the primary owners of industrial corporations while in other
countriessuchastheUnitedStatesbanksareprohibitedfromowningnonfinancialcompanies.

In India, banking companies are defined by Banking Regulation Act, 1949.The section 5(e) of the Act defines banking
company as a company which transacts the business of banking. Such company may be a company constituted under
section3ofIndianCompaniesAct,1956oraforeigncompanyconstitutedundersection591oftheAct.BanksinIndiacarry
ontheiroperationunderoneofthecategories:

i.bodycorporateconstitutedunderspecialstatutes
ii.CompanyregisteredundertheCompaniesAct,1956orforeigncompanies
iii.CooperativesocietyregisteredundertheCooperativeSocietiesAct.

LETUSKNOW
ThenamebankderivesfromtheItalianwordbanco"desk/bench",usedduringtheRenaissancebyFlorentinesbankers,who
usedtomaketheirtransactionsaboveadeskcoveredbyagreentablecloth.However,therearetracesofbankingactivity
eveninancienttimes.Infact,thewordtracesitsoriginsbacktotheAncientRomanEmpire,wheremoneylenderswouldset
uptheirstallsinthemiddleofenclosedcourtyardscalledmacella on a long bench called abancu, from which the words
bancoandbank are derived. As a moneychanger, the merchant at the bancu did not so much invest money, they merely
converttheforeigncurrencyintolegaltenderinRomethatoftheImperialMint.

IMPORTANCEOFBANKING

Bankisanindispensableinstitutionforaneconomy.Itistheinstitutionwhichgivesthemobilitytothefinancialresourceswithinoroutsidetheeconomy.Banksworksasthemediatorofthesavers
andlendersandworkasabridgebetweensavingsandinvestments.Itcaterstothevariousfinancialneedsofindividualsandbodycorporateandalsoworkasanagentinmanyoccasions.Bank
also work as a catalysts of economic growth ensuring money flow to the every section and every corner as per the national priority of the government. The following points will explain the
importanceofthebankinginstitutions

1.Banks act as payment agents by maintaining current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current
accounts.Banksalsoprovideforspeediercustomerpaymentsviaotherpaymentmethodssuchastelegraphictransfer,ATMetc.

2.Banks,byacceptingfundsdepositedindifferentaccounts,acceptingtermdepositsandbyissuingdebtsecuritiessuchasbanknotesandbondsgivemobilitytothesurplusfundsinthehandsof
customerandalsoprovidereturnonthem.

3.Banks, by making advances to customers, by making installment loans, and by investing in marketable debt securities and other forms of lending contribute for expansion of economic and
entrepreneurialactivities.

4.Banksprovidealmostallpaymentservices,andabankaccountisconsideredindispensablebymostbusinesses,individualsandgovernments.Nonbanksthatprovidepaymentservicessuch
asremittancecompaniesarenotnormallyconsideredanadequatesubstituteforhavingabankaccount.Hencebankworksafacilitatorofeconomictransactionsandalsocustodianofmonetary
assetsofcustomer.

CHECKYOURPROGRESS

1.Statetwoimportantpointsregardingimportanceofbanks

CLASSIFICATIONOFBANKS

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Inearliersectionswehavediscussedabouttheconceptofbankinganditsimportance.Nowwewilldiscussthevarioustypesofbanksthatareinoperation.InIndiawefindthefollowingtypesof
banksCentralbank,Commercialbanks,RegionalRuralbanksandCooperativebanks.CentralbankistheregulatoryauthorityofthebankingsysteminIndia.Commercialbankscanbefurther
classifiedasPublicsectorandPrivatesectorbanksandforeignbanksonthebasisofownership.Ontheotherhand,CooperativeBankscanbeclassifiedasStateCooperativeBank(atState
level),Central/DistrictCooperativeBanks(atdistrictlevel)andPrimaryCreditSociety(atvillagelevel)onthebasisofitsareaofoperation.Currently,Indiahas88scheduledcommercialbanks
(SCBs)28publicsectorbanks(thatiswiththeGovernmentofIndiaholdingastake),29privatebanks(thesedonothavegovernmentstaketheymaybepubliclylistedandtradedonstock
exchanges)and31foreignbanks.ANZGrindlaysBank,Citibank,AmericanExpressBankLtd.etc.aresomeoftheforeignbanksoperatinginIndia.Theyhaveawidenetworkofbranchesand
ATMs.Thepublicsectorbanksholdover75percentoftotalassetsofthebankingindustry,withtheprivateandforeignbanksholding18.2%and6.5%respectively.

Figure:ClassificationofBanks

ACTIVITY

Listdownnamesoffivebanksoperatinginyourdistrict.Youcantakehelpfromyourparents/friends/relatives.

CENTRALBANK

Acentralbankisanentityresponsibleforthemonetarypolicyofitscountry.Itsprimaryresponsibilityistomaintainthestabilityofthenationalcurrencyandmoneysupply,butmoreactiveduties
includecontrollingsubsidizedloaninterestratesandactingasalenderoflastresorttothebankingsectorduringtimesoffinancialcrisis.Itmayalsohavesupervisorypowers,toensurethatbanks
andotherfinancialinstitutionsdonotbehaverecklesslyorfraudulently.Centralbanksarenormallygovernmentownedbanks,oftenchargedwithquasiregulatoryresponsibilities,e.g.supervising
commercialbanks,orcontrollingtheinterestrate.Theygenerallyprovideliquiditytothebankingsystemandactaslenderoflastresortintheeventofacrisis.Hence,thebasicobjectivesofa
centralbankare:

Tomaintaintheinternalvalueofthenationscurrency
Topreservetheexternalvalueofthecurrency
Toensureareasonablepricestability
Topromoteeconomicgrowthwiththerisinglevelsofemployment,outputandrealincome
Topromotebankingandfinancialinstitutions.

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Figure:Objectivesofcentralbank

The oldest central bank in the world is the Riksbank in Sweden,whichwasopenedin1668withhelpfromDutchbusinessmen.Thiswasfollowed in 1694 by the Bank of England, created by
ScottishbusinessmanWilliamPatersonintheCityofLondonattherequestoftheEnglishGovernmenttohelppayforawar.TheBulgarianNationalBankwasestablishedon25January1879.The
USFederalReservewascreatedbytheU.S.CongressthroughthepassingoftheGlassOwenBill,signedbyPresidentWoodrowWilsononDecember23,1913.TheReserveBankofIndia(RBI)
isthecentralbankofIndia,andwasestablishedonApril1,1935inaccordancewiththeprovisionsoftheReserveBankofIndiaAct,1934.Sinceitsinception,ithasbeenheadquarteredinMumbai.
Thoughoriginallyprivatelyowned,RBIhasbeenfullyownedbytheGovernmentofIndiasincenationalizationin1949.

Thereisnostandardterminologyforthenameofacentralbank,butmanycountriesusethe"BankofCountry"form(e.g.,BankofEngland,BankofCanada,BankofRussia).Somearestyled
nationalbanks,suchastheNationalBankofUkraine.Inothercasestheymayincorporatetheword"Central"(e.g.EuropeanCentralBank,CentralBankofIreland).Inmanycountries,theremay
beprivatebanksthatincorporatethetermnational.Manycountrieshavestateownedbanksorotherquasigovernmententitiesthathaveentirelyseparatefunctions,suchasfinancingimportsand
exports.

In some countries, particularly in some Communist countries, the term national bank may be used to indicate both the monetary authority and the leading banking entity, such as the USSR's
Gosbank (state bank). In other countries, the term national bank may be used to indicate that the central bank's goals are broader than monetary stability, such as full employment, industrial
development,orothergoals.Theword"Reserve"isalsoused,primarilyintheU.S.,Australia,NewZealand,SouthAfricaandIndia.

FUNCTIONSOFCENTRALBANK

Inviewoftheaboveobjectives,thecentralbankofadevelopingcountryperformsvariousfunctionsfromtimetotime.Thesefunctionsmaybegroupedasfollows:

AsaMonetaryAuthority

1.Formulates,implementsandmonitorsthemonetarypolicy.
2.Maintainspricestabilityandensuresadequateflowofcredittoproductivesectors.
3.Maintainsoptimumliquidityintheeconomy.

AsaRegulatorandsupervisorofthefinancialsystem

1.Prescribesbroadparametersofbankingoperationswithinwhichthecountry'sbankingandfinancialsystemfunctions.
2.Supervisesthebanksandfinancialinstitutions
3.Maintainpublicconfidenceinthesystem,protectdepositors'interestandprovidecosteffectivebankingservicestothepublic.
4.Settingtheofficialinterestrateusedtomanagebothinflationandthecountry'sexchangerateandensuringthatthisratetakeseffectviaavarietyofpolicymechanisms.

AsaManagerofExchangeControl

1.Managestheforeignexchangereservesinthecountry.
2.FacilitateexternaltradeandpaymentandpromoteorderlydevelopmentandmaintenanceofforeignexchangemarketinIndia.

AsaIssuerofcurrency

1.Issuesandexchangesordestroyscurrencyandcoinsnotfitforcirculation.
2.Ensureadequatequantityofsuppliesofcurrencynotesandcoinsandingoodquality.

AsaBankertotheGovernment

1.Performsmerchantbankingfunctionforthecentralandthestategovernmentsandalsoactastheirbanker.
2.HelpstheGovernmentboththeCentralandStatesinmanagingpublicdebt.

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AsaBankertobanks

1.Maintainsbankingaccountsofallscheduledbanks.
2.Providesloantocommercialbank

CHECKYOURPROGRESS

Discussthefunctionsofcentralbankasregulatorofthefinancialsystem.

ACTIVITY

1.WhydowerequireBanks?

COMMERCIALBANKS

Commercialbanksarethebanksthatextendtheshorttermloanstotheindividuals,businessmen,tradersandindustriesapartfrommobilizingsavingsthroughsavingsaccount.Thecommercial
banks are generally organized as Joint Stock Company. As such the bank raises its capital through sale of its stocks and shares. Generally, commercial banks provide short term loans to
commerceandindustry.However,withtheharmonizationofthebankingsystem,thesecommercialbankshavebeenprovidinglongtermfinancealso.Thespecialfeatureofthecommercialbankis
thattheycancreatecredit.Thecommercialbankingsystemconsistsofscheduledandnonscheduledbanks.

1.ScheduledCommercialBanks

ThebanksincludedinthesecondscheduleoftheReserveBankofIndiaAct,1934arecalledScheduledCommercialBanks.TheReserveBankofIndiaAct,1934undersection42(6)includes
bankinginstitutioninthescheduleprovidedthat:

1.ItsatisfiestheRBIthatitsaffairsarenotconductedinamannerdetrimentaltotheinterestofitsdepositors
2.Itspaidupcapitalandreserveshaveanaggregatevalueofnotlessthanitsstipulatedamountfixedfromtimetotime
3.ItcanbeastatecooperativebankorIndianorforeigncommercialbank.

ThescheduledcommercialbanksavailcertainfacilitiesfromtheRBIlikecoverageofDepositInsuranceSchemeandtheCreditGuaranteeSchemeandrefinancefromthedevelopmentbanks.
TheyhavetoabidebyallthedirectivesissuedbytheReserveBankofIndiafromtimetotime.

1.Nonscheduledbanks

BankswhicharenotincludedinthescheduleoftheReserveBankofIndiaAct,1934arecallednonscheduledbanks.Therewere474nonscheduledbanksintheyear1951outoftotal566banks
inIndia.Throughtheprocessofmerger,acquisitionandamalgamationthenumberofnonscheduledbankisreducedto3in1989.Presently,thereisnononscheduledbankinIndiaandhencethis
classificationhasnopracticalexistence.
Thecommercialbankscanagainbeclassifiedintotwocategoriespublicsectorandprivatesectorbanks.

1.Publicsectorbanks

Publicsectorbanksarethosewheremorethen50percentsharesareheldbyGovernmentandtherestareheldbyprivatepartiesorindividuals.Theownershipofthebank remains with the


Government.StateBankofIndia,PunjabNationalBank,CanaraBank,BankofBarodaetcareexamplesofpublicsectorbanks

1.Privatesectorbanks

Ifabankispromotedandmajorityofthesharesareheldbytheprivatepartiessuchabankiscalledprivatebank.Ownershipandmanagementofthistypeofbankisvestedonprivateparties.
ICICIBank,AxisBank,IDBIBank,YesBank,KotakMahindraBanketc.areexamplesofprivatesectorbanks.

FUNCTIONSOFCOMMERCIALBANKS

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Now,wewilldiscussthefunctionsofcommercialbanks,whichcanbeclassifiedasunder:

1.Acceptanceofdepositsandsavingsmobilization is the most primary function of commercial banks. Commercial banks accept three types of deposits from the customers. (i) Fixed deposit a
depositforafixedperiodwhichgivesahigherrateofinterest.Themoneysodepositedcannotbewithdrawnbeforetheexpiryoftheperiod.Henceitisalsocalledtimedepositortermdeposit
(ii)CurrentaccountdepositItisalsoknownasdemanddepositasbecausethedepositamountisreturnedbythebanktothecustomerondemand.Thecustomercanwithdrawatanytime
he/shewants.Generallynointerestisgivenonthesedepositsbythebank(iii)Savingsaccountdepositthisisalsolikecurrentaccountbutwithcertainrestrictionslikerestrictionsinwithdrawal
ofmaximumamountinaday,numberofwithdrawalperweeketc.Depositsacceptedunderthisaccountfetchesanominalrateofinterestwhichisratherlowerthanwhatisofferedbythefixed
deposits.Throughthistypeofaccountcommercialbanksencouragethesmallsavings.

2.IssueofmoneyItisintheformofbanknotesandcurrentaccountssubjecttochequeorpaymentatthecustomer'sorder.Theseclaimsonbankscanactasmoneybecausetheyarenegotiable
and/orrepayableondemand,andhencevaluedatparandeffectivelytransferablebymeredeliveryinthecaseofbanknotes,orbydrawingacheque,deliveringittothepayeeforpayment.

3.NettingandsettlementofpaymentsBanksactbothascollectionagentandpayingagentsforcustomers,andparticipateininterbankclearingandsettlementsystemstocollect,presentandpay
paymentinstruments.Thisenablesbankstoeconomiseonreservesheldforsettlementofpayments,sinceinwardandoutwardpaymentsoffseteachother.Italsoenablespaymentflowsbetween
geographicalareastooffset,reducingthecostofsettlingpaymentsbetweengeographicalareasby processing of payments by way of telegraphic transfer, EFTPOS, internet bankingorother
means.

4.CreditintermediationThedepositsreceivedbythebanksareredirectedtowardstheborrowerswhoareinneedofmoneyintheformofloansandadvances.Banksborrowandlendbacktoback
ontheirownaccountasmiddlemen.Byacceptingmoneyontermdepositandlendingmoneybywayofoverdraft,cashcredit,installmentloanorotherwisebanksactasintermediariestothe
savingsandinvestmentprocess.

5.CreditqualityimprovementBankslendmoneynotonlytoordinarycommercialandpersonalborrowers(ordinarycreditquality),butalsotohighqualityborrowers.Theimprovementcomesfrom
diversification of the bank's assets and the bank's own capital which provides a buffer to absorb losses without defaulting on its own obligations. However, since banknotes and deposits are
generallyunsecured, if the bank gets into difficulty and pledges assets as security to try to get the funding it needs to continue to operate, this puts the note holders and depositors in an
economicallysubordinatedposition.

6.MaturitytransformationBanksborrowmoreondemanddebtandshorttermdebt,butprovidemorelongtermloans.Bankcandothisbecausetheycanaggregateissues(e.g.acceptingdeposits
and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain reserves of cash, invest in marketable securities that can be readily converted to cash if
needed,andraisereplacementfundingasneededfromvarioussources(e.g.wholesalecashmarketsandsecuritiesmarkets)becausetheyhaveahighandmorewellknowncreditqualitythan
mostotherborrowers.

7.CreditcreationAspointedoutabove,grantingofloansandadvancesisanimportantfunctionofcommercialbank.Buttheprocessbywhichtheygrantloansandadvancesissignificantforthe
economy.Wheneverthebanklendsmoney,itcreatesadepositoraliabilityagainstitself.Sincethedepositofbankcirculateasmoney,thecreationofsuchdepositleadstoanincreaseinmoney
stockintheeconomy.Thisisknownascreationofmoneyorcredit.

8.Act as promoter to the economic activities providing documentary and standby letters of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off
balancesheetexposures

9.Providecustodianandsafekeepingservicesofmoneyandothervaluablesofcustomers,likedocumentsandotheritemsinsafedepositboxes

10.Commercialbanksinrecenttimesdealsinmanyotherfinancialinnovationlikecurrencyexchangesale,distributionofbrokerage,mutualfundunit,sharebrokingandsimilarfinancialproductsasa
'financialsupermarket'

CHECKYOURPROGRESS

1.Statethreefunctionsofcommercialbanks.

2.Statewhetherfollowingstatementsaretrueorfalse

a.Thecommercialbanksperformscustodianfunctionforthecentralandthestategovernmentsandalsoactsastheirbanker.

b.ScheduledbanksarenotincludedinthesecondScheduleoftheRBI

COOPERATIVEBANKS

TheCooperativebanksareinstitutionsestablished with principles of cooperation. The objective of such organization is to facilitate rural credit and to promote thrift and selfhelp among the
farmersandeconomicallyweakersectionsofthesocietywhoareintheeconomicevilsandmoraldegeneration.Likecommercialbanks,thecooperativebanksalsoreceivedepositsandlend
money.Buttheylendmoneytotheirmembersandmakeincidentalprofits,althoughtheirsoleobjectiveisnotprofitmaking.ThecooperativecreditmovementinIndiabeganwiththepassingofthe
CooperativeCreditSocietiesActof1904.TheActprovidedfortheformationofcreditsocieties,emphasizingonruralcredit.Unlimitedliabilitywastheruleinruralsocieties.Thesecreditsocieties
slowlypavedthewayintheformationofcooperativebanks.

ThecooperativebankinginIndiahasgrowninsizeandvolume.AspecialfeatureofcooperativebanksinIndiaisitsfederalstructure,theunitsrangingfromprimaryleveltonationallevel.Co
operativeBankinginIndiacanbedividedintotwoimportantareas,namely,

AgriculturalCooperativeBankTheyareprimarilyoperativeatthevillagelevel,CentralCooperativebankatthedistrictlevelandtheStatecooperativebankatthestatelevel.
NonAgriculturalCooperativeBankTheymainlyincludeUrbanCooperativebank,EmployeeCreditcooperativebanksandHousingCooperativebank.

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SomeimportantfeaturesofCooperativeBanksinIndia

CooperativebanksaregovernedbytheCooperativeSocietiesAct,1912,theReserveBankofIndiaAct,1934aswellastheBankingRegulationAct,1949.
The cooperative banking system comprise of State Cooperative Banks (SCBs) at the state level, Central Cooperative Banks (CCBs) at the district level, Primary Agricultural Credit Societies
(PACSs)atthevillagelevel,LandDevelopmentBanks(LDBs)andUrbanCooperativeBanks(UCBs).
Theygenerallycatertothecreditneedsofthefarmersandruralpopulation.However,thesedayscooperativebanksespeciallytheSCBsaredoingcommercialbankingtoo.
Theyperformallthemainbankingfunctionsbutworkonanoprofit,nolossbasis.
TheyareonlypartiallyfinancialintermediariesbecauseasignificantpartoftheirresourcesareintheformofborrowingsfromtheRBI,NABARD,CentralandStateGovernmentsandCooperative
ApexInstitutions.CertainCooperativeBanks(e.g.LDBs)raiseresourcesbyissuingdebenturesofdifferenttypes.
Cooperativebanksaccountfor42percentofinstitutionallendingtotheruralsectoranditcoversabout65percentoftheruralpopulation.
Theycompriseofscheduledandnonscheduledcooperativebanks.
EarliertheirinterestrateswereregulatedbytheRBI,buttheyhavebeenmostlyderegulatednow.(Theyarealsogenerallysubjecttomonetarycontrols).
Theapexbodyforregulatingandpromotingthecooperativebanks/creditistheNationalBankforAgricultureandRuralDevelopment(NABARD)

Thecooperativecreditsysteminthecountryisintwoarmsforshorttermcredit(productioncredit)structureandlongtermcredit(Investmentcredit)structure.Theshorttermcooperativecredit
structurehasitsbaseatthePrimaryCreditSocieties(PACS)dealingmainlyincredit,theFarmersServiceSocieties(FSS)whicharemultipurposeprimarysocietieswithalargeareaofoperation
andmembership.ThesesocietiesareaffiliatedtotheDistrictCentralCooperativeBanksatdistrictlevelwhichinturnaffiliatedtoStateCooperativeBanksatthestatelevel.Atpresent,thereare
morethanalakhPACS,about500DCCBsand28SCBsaresupplyingshorttermandmediumtermagriculturalcredittotheruralareas.

Figure:CooperativeCreditSystem

Thelongtermcreditstructureconsistsof19StateCooperativeAgriculturalandRuralDevelopmentBanks(SCARDBs)withabout800PrimaryCooperativeAgriculturalandRuralDevelopment
Banks(PCARDBs)inrespectoffederalstructureandaround1500branchesintheunitarystructure.Cooperativebankinghasbeenquitesuccessful.Therehasbeenanimpressivegrowthin
deposits,creditandworkingcapitalofthesebanks.

ACTIVITY

Distinguishbetweenacommercialbankandcooperativebank

REGIONALRURALBANKS

RegionalRuralBankshavebeeninexistenceforaroundthreedecadesintheIndianfinancialscene.InceptionofRegionalRuralBanks(RRBs)canbeseenasauniqueexperimentaswellas
experienceinimprovingtheefficacyofruralcreditdeliverymechanisminIndia.WithjointshareholdingbyCentralGovernment,theconcernedStateGovernmentandthesponsoringbank,aneffort

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wasmadetointegratecommercialbankingwithinthebroadpolicythrusttowardssocialbankingkeepinginviewthelocalpeculiarities.ThegenesisoftheRRBscanbetracedtotheneedfora
strongerinstitutionalarrangementforprovidingruralcredit.Sincetheearly1970stherewasagrowingrealizationthattheworkingsofthebankswerenotuptothelevelofsatisfactionsofaras
creditneedsoftheruralpopulationwereconcerned,especiallythoseoftheweakersection.Subsequently,theGovernmentofIndiaappointedaWorkingGroupin1975tostudytheproblemandto
evolveanalternativechannelofcreditforthosesectionsofthesociety.Accordingtotherecommendationofthecommittee,theGovernmentpromulgatedtheRegionalRuralBanksordinanceon
September26, 1975 which was later replaced by the Regional Rural Banks Act, 1976. The creation of RRBs as a new set of regional oriented rural banks, have combined the local feel and
familiarityofruralproblemswiththeprofessionalismandlargeresourcebaseofcommercialbanks.ThepreambletotheRegionalRuralBanksActstatesthattheobjectofsettinguptheRRBsisto
develop the rural economy by providing, for the purpose for the development of agriculture, trade, commerce, industry and other productive activities in rural areas, credit and other facilities
particularlytosmallandmarginalfarmers,agriculturallabourers,artisansandsmallentrepreneurs.
ThebasicfeaturesoftheRRBsare

1.StateSponsoredRRBsarejointlysponsoredbytheCentralGovernment,StateGovernmentandascheduledcommercialbank,generallyapublicsectorbank.TheequityofaRRBisheldbythe
CentralGovernment,concernedStateGovernmentandtheSponsorBankintheproportionof50:15:35.
2.RegionallyBasedTheoperationsoftheRRBsarespreadoveraregion.Generally,aRRBisallottedacompactareaofonetofivedistrictswithinthestatewithhomogeneityinagroclimaticand
socioeconomiccharacteristics.
3.CommercialBankingFunctionThesebanksmayacceptalltypesofdepositsfromcustomersandgrantloansandadvancesandcarryonthebusinessofbankingcoveredundertheBanking
RegulationAct,1949.
4.RuralOrientedThesebanksemphasisandconcentrateontheweakersectionsandtheruralactivitieswhilegrantingloansandadvances.MostofthebranchesofRRBsaregenerallysituatedin
theruralareas.Theseplayaneffectiveroleinmobilizationofsavingsintheruralareas.
5.ConsortiumCharacterinManagementThemanagementoftheRegionalRuralBanksisvestedinaninemembersBoardofDirectors,headedbyaChairmenwhoisanofficerdeputedbythe
sponsorbankbutappointedbytheGovernmentofIndia.SixmembersintheboardofdirectorshavetobeappointedbytheCentralGovernment,twobythesponsoredbankandonebytheState
Government.
6.FinancialResourcesThefinancialresourcesofRRBscomefromthedepositsmobilizedbythem,refinancefromRBIandadvancesfromthesponsoringbankonliberalterms.Theyalsoget
refinancefromtheRBIinthesametermsonwhichrefinancearegiventocooperativebanks.

GrowthofRRB
Overtheyears,theRRBs,whichareoftenviewedasthesmallmansbank,havetakendeeprootsandhavebecomeasortofinseparablepartoftheruralcreditstructure.Theyhaveplayedakey
roleinruralinstitutionalfinancingintermsofgeographicalcoverage,clienteleoutreachandbusinessvolumeasalsocontributiontodevelopmentoftheruraleconomy.Aremarkablefeatureoftheir
performanceoverthepastthreedecadeshasbeenthemassiveexpansionoftheirretailnetworkinruralareas.Fromamodestbeginningof6RRBswith17branches covering 12 districts in
December1975,thenumbershavegrowninto196RRBswith14,446branchesworkingin518districtsacrossthecountryinMarch2004.RRBshavealargebranchnetworkintheruralarea
formingaround43percentofthetotalruralbranchesofcommercialbanks.

TheruralorientationofRRBsisformidablewithruralandsemiurbanbranchesconstitutingover97percentoftheirbranchnetwork.ThegrowthinthebranchnetworkhasenabledtheRRBsto
expandbankingactivitiesintheunbankedareasandmobiliseruralsavings.RRBswereestablishedwithaviewtodevelopingtheruraleconomybyproviding,forthepurposeofdevelopmentof
agriculture,trade,commerce,industryandotherproductiveactivitiesintheruralareas,creditandotherfacilities,particularlytosmallandmarginalfarmers,agricultural labourers, artisans and
smallentrepreneurs,andformattersconnectedtherewithandincidentalthereto(RRBsAct,1976).

ThepresenceofRRBsshowswidevariationbothacrossStatesandsponsorbanks.AlthoughRRBsarespreadovertwentysixStates,theyhavemostoftheirpresenceinsevenStates,i.e.,
AndhraPradesh,Bihar,Karnataka,MadhyaPradesh,Maharastra,RajasthanandUttarPradesh.UttarPradeshhasthehighestnumberofRRBs,i.e.,thirtysixandKeralahasgotonlytwoamongst
themajorStatesofthecountry.TheNorthEasternStateslikeManipur,Meghalaya,MizoramandNagalandhavegotonlyoneRRB.Likewise,sevensponsorbanksamongsttwentyeight,viz.,
BankofBaroda,BankofIndia,CentralBankofIndia,PunjabNationalBank,StateBankofIndia,UnitedBankofIndiaandUCOBankaccountformorethanthreefifthsoftheRRBs.

CHECKYOURPROGRESS

A)Statewhetherfollowingstatementsaretrueorfalse
a.Thestructureofthecooperativecreditstructureisthreetier.
b.Cooperativebankscannotperformcommercialbankingfunctions
c.TheRRBscannotexpanditsbranchesatnationallevel

PRIVATEBANKING

Afterdiscussingcentralbank,commercialbanks,cooperativebanksandregionalruralbanks,nowwearegoingtodiscusstheprivatebanking.Thesearepracticesexpandedrecentlybythe
bankstotapwidermarket.InfactBanks'activitiescanbedividedintoRetailBanking,BusinessBanking,CorporateBanking,PrivateBankingandInvestmentBanking.

1.Retailbankingmeansdealingdirectlywithindividualsandsmallbusinesses
2.Businessbankingmeansprovidingservicestomidmarketbusiness
3.Corporatebankingmeansdealingwithlargebusinessentitiesdirectly
4.PrivatebankingmeansprovidingwealthmanagementservicestoHighNetWorthIndividualsandfamilies
5.Investmentbankingmeansactivitiesrelatingtothefinancialmarkets.

Privatebankingisatermforbanking,investmentandotherfinancialservicesprovidedbybankstoprivateindividualshavingasizableassets.Thetermprivatereferstothecustomerservice
beingrenderedonamorepersonalbasisthaninmassmarketretailbanking,usuallyviadedicatedbankadvisers.Itshouldnotbeconfusedwithaprivatebank,whichissimplyanonincorporated
bankinginstitution.

Historicallyprivatebankinghasbeenviewedasveryexclusive,onlycateringforhighnetworthindividualswithliquidassetsover$1million,althoughitisnowpossibletoopensomeprivatebank
accountswithaslittleas$50,000forprivateinvestors.Aninstitutionsprivatebankingdivisionwillprovidevariousservicessuchaswealthmanagement,savings,inheritanceandtaxplanningfor
theirclients.Ahighlevelformofprivatebanking(fortheespeciallyaffluent)isoftenreferredtoaswealthmanagement.Thewordprivatealsoalludestobanksecrecyandminimizingtaxesvia
carefulallocationofassets.Anoffshorebankaccountmaybeusedforthispurpose.PrivateBankingconsistsofawholegambitofservicesrequiredtofreetheclientofoperationalhassles.Asa
onestopshopforyourfinancialneedsPrivateBankingensuressmoothfunctioningforcustomersateverystep.

SERVICESOFFEREDUNDERPRIVATEBANKING

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PortfolioAdvisoryServices
Advisory Desk consists of an experienced research team headed by Head Advisory Desk. Detailed Research combined with indepth technical analysis is used for deciding the investment
universe,whichcomprisesofCommodities,Derivatives,DirectEquity,MutualFunds,Bonds,IPO/NFOs,etc.Theprocessofputtingtogetheraportfoliorecommendationfortheclientgoesthrough
a 4stage process of Screening, Fundamental Research, Model Portfolio Construction and Implementation. Private Banking ensures that a diversified portfolio of securities is developed in
consultationwithcustomers.Thesesecuritiesarecarefullyselectedtointegrateintocustomersoverallfinancialplanandreflecttheriskwithwhichtheyarecomfortable.Thesecuritiescouldbe
fromanarrayofassetclassesequities,debt,mutualfunds,insuranceandproperty.

NonDiscretionaryPortfolioManagement
Here,investmentresearchteamconstructsclientsportfolioafterdoingathoroughriskrewardanalysis of the financial products in the market. This is finally brought by them to their very own
privatebankerwhoistheironepointcontactforalltheirfinancialrequirements.Themostimportantaspectofthisprocessistheoptimalallocationofclientsassets.Itisthecriticalfactoraffecting
thepotentialreturnonclientsinvestments.PrivateBankinghelpstheclientinidentifyinghisowninvestmentprofile,whichfullyreflectshisspecificneeds,expectationsandhisattitudetowardsrisk
andexpectedreturn.Whiledesigningcustomersfinancialplan,Banksunderstandthetaximplicationsandadvisethemtostructuretheownershipoftheirassetsusingappropriatevehicles,soas
tooptimizethereturnsontheirassets.

OperationalandRegulatorService
RightfromensuringPANavailability,procuringlegalpermissionstoenableclientstotradeinthemarkettopaymentbills,PrivateBankingtakescareoffinancialand regulatory requirements of
customers.

Transactionsservice
PrivateBankingensuressmoothflowofallinvestmentsandbankingtransactions.PrivateBankerwillcontinuouslymonitorclientsinvestmentsonanongoingbasisandkeepintouchregularlywith
themabouttheirperformance,whichallowsforfinetuningof clients financial strategy to their changing requirements. Inhouse investment advisory and research capabilities complemented by
outsidespecialistsensurethatcustomersarekeptfullyinformedaboutemergingtrends,providinginvestmentadvicethatisalwaysobjectiveandthoroughlyresearched.Theybringportfoliodata
regularlyonamonthlybasisoratthefrequencydesiredbytheclients.

Trust&EstatePlanning
ThisofferingisinlinewiththephilosophyofWealthGeneration,WealthPreservationandWealthTransmission.

PrivateInvestmentBanking
Privatebankingoffersthebusinessenterprises,intheSMEandmidcorporatesegments,adviceontheirbusinessandsolutionstotheirfundraisingandbusinessrestructuringrequirements.

ValueAddedServices
As a one stop financial solution provider, private banking bring to customer a wide spectrum of valueadded services. Apart from Investment Advisory Services private banking also provide:
TransactionExecutionplatform,CustodialServices,BankingServices.

1.TransactionExecutionplatform:Privatebankingprovideinternal&externalplatformtoexecuteequity,debt,mutualfunds,insurance,propertyandforeignexchangetransactions.Theyfacilitate
toexecutetransactionsthroughMutualFundshouses,property,insurance,taxandlegalconsultantstohelpcustomers.
2.CustodialService: Private banking offers comprehensive share custody system handles all aspects of processing portfolio updating, scrip handling and registration, settlement, dividend,
bonus/rightsissueshandlingandclientreporting,debtsecuritiesservices(debtmarket)anddepositoryservices.
3.BankingServices:Alongwiththemoresophisticatedfinancialinstrumentsatcustomersdisposal,theyalsoofferafullrangeofbankingservices,backedbytheconvenienceoffacilitiessuchas
netbanking,remittances,depositandloanproducts.

ServicestoNRIs
PrivatebankingtakescareofinvestmentneedsandNRIsresidentialstatusandprovidethemarrayofservicesandproductsdesignedtokeepthemincontroloftheirfunds.Privatebankingplans
investmentinfinancialmarketstakingcareoftheirclientsregulatoryrequirements,throughpowerfulNetbanking.Moreover,privatebankingmanagesNRIsoperationalneedsthroughinhouse
custodialservicesofferings.

BenefitsofPrivateBanking
Intodaysdynamicandincreasinglycomplexinvestmentenvironment,privatebankinghelpscustomersinmakingkeydecisionsrelatingtofinanceandwealth.Thefollowingbenefitsaregenerally
availableunderprivatebankingservices
i)Manyfacilitiesundersinglewindow

1.SavingAccount,FixedDeposits,RecurringDeposits,CurrentAccounts
2.ResidentForeignCurrency(Domestic)Accountsetc.
3.AssetProductsHomeloans,Car&Personalloans,Loanagainstsecuritiesetc.
4.InvestmentGovernmentofIndiaBonds,MutualFunds,CapitalGainBondetc.
5.Insurance
6.WebTradeandDematAccounts
7.GoldBars&Coins
8.ForeignExchangeServices
9.InternationalDebitandCreditcardsetc.

ii)ExclusivityandConvenience

1.RelationshipManager
2.Separateinteractionareainthebranch
3.AnywhereBankingfacility
4.ExclusivePhoneBankingservice

iii)CompetitivePricing

1.Reducedratesforproductsandservices
2.SeveralComplimentaryOffers
3.Valuelinkedbenefits

iv)ValueAddedFacilities
DebitCard
PrivateBankingcustomersareprovidedwithapersonalizedPrivateBankingDebitCard.Exclusivefeaturesofthiscardare:

1.HighPurchaseLimits
2.FuelSurchargeWaiver
3.InternationalAcceptance
4.FreeSMSandEmailAlertsonpurchase
5.ATMInterchangeWaiver
6.ZeroLiabilityProtection

CreditCard
PrivateBankingCreditCardmemberdeservesnothingbutthebest.

Exclusivefeatures

1.LowInterestRateIntroductory6monthofferofonly1.49%permonthofbothCashandRetailtransactions.After6monthstheinterestratewillchangeto2.49%.LowbalanceTransferratesof
only0.49%permonthfor6monthsonlyforICICIBankPrivateBankingCreditCardholders!
2.WavieroffuelsurchargeatHPCLPetrolPumps
3.Conciergeservicewhichinclude:

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1.TravelServices
2.CarRentalandLimousineService
3.BusinessServices
4.Hotel&Diningoffers
5.ExpressRewards
6.Internetbanking
7.Valuebenefitsandmuchmore

PrivateBankingisaonestepfinancialsolutionprovider,offeringaboardspectrumofvalueaddedservicestoclients.ThemajorinternationalgroupsofferingprivatebankingservicesareUBS,
Citigroup,HSBC,CreditSuisse,MerrillLynch,DeutscheBank,ABNAMROwhileICICIBank,HDFCBank,INGVysyaBankareamongthetoprankingIndianbanksofferingprivatebankingin
India.

CHECKYOURPROGRESS

A)StatetwofeaturesofDebitcard.

B)Selectthecorrectanswer
PrivateBankingservicesareprovidedto
a.Smallinvestorsb.Highnetworthindividuals
c.Privatecompaniesd.alloftheabove

ACTIVITY

1.Collectafewnamesofbankswhoofferprivatebankingandlistdowntheservicestheyofferunderprivatebanking.

LETUSSUMUP

Nowyouareawarethatbankingmeansacceptanceofdepositsofmoneyfromthecustomersforlendingorinvestment.Suchdepositsareacceptedunderdifferentaccounthavingdifferent
features.Depositsmaybepayableondemandormaybeforacertainperiodoftimeasperthenormsoftheaccountunderwhichthedepositsareaccepted.Customersareallowedtowithdraw
theirdepositsbycheque.

BankinginIndiamainlygovernedbytheBankingRegulationAct,1949andReserveBankofIndiaAct,1934.Section6ofBankingRegulationActidentifiesthepermissibleandprohibitedbusinesses
ofabank.

Banksareclassifiedasthecommercialbanks,cooperativebanksandregionalruralbanks.However,allofthethreecanofferthecommercialbankingfunctionsasperthelaw.Cooperativebanks
andRegionalRuralBankscatertothecreditneedsofagricultureandruralareaswhilecommercialbankscatertothecreditneedsacrossthesectorsandareas.CooperativeBanksare
establishedunderthecooperationprinciplesandregisteredundertheSocietiesRegistrationAct,1912.Theyarestructuredinthreetiers.RRBsoperateinaspecifiedallottedareaofafewdistricts
.RRBsarepromotedbytheCentralGovernment,StateGovernmentandasponsoredscheduledbank.

Thecentralbankistheapexbodyofthebankingandmonetarysystemofacountry.Differentcountrieshavedifferentnamesforcentralbank.InIndiathenameofthecentralbankistheReserve
BankofIndia.Itisthebodywhichregulatestheentirebankingandfinancialsystem.Italsoissuesnotes,workasaGovernmentsbankandBankersBank.Asaheadofthemonetarysystemthe
centralbankissuesmonetaryandcreditpolicytocontrolthemoneysupplyandstabilizepricelevel.

Amongvariousinnovativeservicesofbanks,privatebankinghasbecomeaveryimportantone.Privatebankingmeansprovidingbanking,investment,assetandwealthmanagementandother
financialservicestoaprivateindividualbyabankgivingpersonalattention.Thisserviceisofferedtothehighnetworthindividuals(richcustomers).

FURTHERREADINGS

IndianBankingbyS.NatarajanandR.Parameswaran,S.Chand,NewDelhi.
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ReserveBankofIndiaBulletins.

ANSWERSTOCHECKYOURPROGRESS

ANSWERTOCHECKYOURPROGRESS1
A)a.Banksprovidefinancialassistancetothecustomers
b.Banksactsasthepaymentagentsofthecustomers

ANSWERTOCHECKYOURPROGRESS2
A)a.Supervisesthebanksandfinancialinstitutions
b.Setstheinterestrates.

ANSWERTOCHECKYOURPROGRESS3
A)a.Commercialbanksacceptsdepositsfromthepublic
b.Commercialbankscreatecredit.
c.Commercialbankspromoteeconomicdevelopmentofthecountry
B)a.False
b.False

ANSWERTOCHECKYOURPROGRESS4
A)(a)True
(b)False
(c)True

ANSWERTOCHECKYOURPROGRESS5

A)a.HighPurchaseLimits
b.Internationalacceptance
B)b

POSSIBLEQUESTIONS

1.Definebank.Discussthefunctionsofcommercialbanks.

2.Whyacentralbankisrequired?ExplainthebasicfunctionsoftheCentralBank.

3.Discusstheimportanceofcooperativebanks.HowaretheydifferentfromtheRRBs?

4.Writetheadvantagesofprivatebanking.

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